CIIS Report. China s FTA Strategy. No. 11 October China s FTA Strategy

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1 CIIS Report China s FTA Strategy i China s FTA Strategy No. 11 October 2016

2 ii CIIS REPORT About CIIS China Institute of International Studies (CIIS) is the think tank of Chinese Foreign Ministry. Founded in 1956, CIIS is one of the oldest research institutions specialized in international studies in China. It conducts research and analysis focusing primarily on medium- and long-term policy issues of strategic importance to China, particularly those concerning international politics and world economy. It also makes comments and policy recommendations on major world events and hot international issues. About CIIS Report Contributed by researchers at CIIS and published aperiodically, CIIS Report brings forth a series of research papers on hot issues of international relations as well as on major aspects of China s diplomacy. Presented with clear-cut views based on detailed and substantive information and in-depth analysis, CIIS Report aims at offering a comprehensive picture of assessment of the situation, academic studies and policy evaluation in clear and precise language. CIIS Report is published both in Chinese and English and downloadable on the website of CIIS ( cn). The views expressed in CIIS Report are those of the author(s) or their research group only and do not necessarily reflect the official position of CIIS.

3 CIIS Report China s FTA Strategy Jiang Yuechun Wang Zhenyu Tang Qifang Li Xiaoyu No October 2016

4 ii CIIS REPORT CONTENTS Acronyms Summary v vii I. The Emergence and Development of Current Major FTAs around the World 1 A. The emergence of TPP and TTIP negotiations as pillars of the US Dual-Ocean Strategy 1 1. TPP may become the main channel for Asia-Pacific regional cooperation 1 2. TTIP is likely to become the largest FTA in the world 2 3. Strategic considerations of the United States in adopting the Dual-Ocean Strategy 3 B. The emergence of RCEP as an upgraded version of East Asia regional cooperation 5 1. RCEP has become a new pathway to East Asia regional cooperation 5 2. RCEP negotiations have entered a critical stage 5 3. The RCEP negotiations are viewed with optimism 6 C. China-Japan-Korea FTA negotiations continue to move forward amidst deterioration of bilateral relations 7 1. The emergence and development of China-Japan-Korea FTA negotiations 7 2. Favorable conditions for building the CJK FTA 8 3. Important factors affecting the negotiation process 8 II.China Lags Behind in FTA Development on the Whole 10 A. The current situation of China s FTA development 10 B. China lags behind the US, the EU and ASEAN countries in FTA development on the Whole 11 III. Challenges for China in Accelerating Its FTA Development 15 A. Trade protectionism is the main obstacle to the implementation of China s FTA strategy China s rapid economic development calls for greater share of the overseas market Anti-dumping investigations against China are on the rise Discrimination is a feature shared by FTAs and trade barriers 16 B. Difficulties China faces in establishing FTAs with major developed countries Some FTAs have been established after hard and long-time negotiations, while others though initiated make little progress China and the EU are still exploring the feasibility of building a bilateral FTA It is difficult to initiate China-Japan FTA negotiations in the near future There is little hope to commence China-US FTA negotiations soon 20 C. China faces challenges in exercising its right to formulate new international trade rules together with other countries 21

5 China s FTA Strategy iii 1. Competing for the right to formulate new international trade rules is the main purpose of developed countries such as the United States, the EU and Japan for their enthusiastic FTA promotion The essence of competition for the right to formulate new rules is a North-South conflict China as a developing country can hardly adapt to the high-standard arrangements aiming at the next-generation trade and investment issues It is difficult for China as a rising developing country to join the next-generation FTAs dominated by developed countries 23 D. Geopolitical factors constrains China s FTA development China has been constrained by geopolitical factors since it started FTA development The TPP has created dissensions within ASEAN The CJK FTA negotiations have been disturbed by Sino-Japanese and Japan-South Korea political relations 25 E. China also faces institutional bottlenecks in implementing its FTA strategy The United States has relatively sound institutions for implementing its FTA strategy South Korea is quite successful in implementing its FTA strategy due to its active institutional building China should make greater efforts in institutional building as compared to the United States and South Korea 28 IV. China s Concrete Plans and Policy Choices in FTA Development 29 A. Actively support the Doha Round negotiations and safeguard the WTO multilateral framework The multilateral trade system is still important against the backdrop of economic globalization The WTO will continue bringing important economic benefits to its member countries China should make efforts to break the stalemate in the Doha Round negotiations as early as possible 33 B. China should have its feet firmly planted in its neighborhood and focus on the construction of FTAAP on the basis of East Asian regional cooperation FTA development within the East Asian framework have reached a critical stage Properly handle the relationship between TPP and RCEP Promote East Asian FTA process with the FTAAP as the objective 37 C. Accelerate the establishment of FTAs with developing countries and create a model for South-South FTAs 39

6 iv CIIS REPORT 1. Build a FTA network that covers the regions along the Belt and Road Take advantage of the progress made in financial cooperation to gradually promote the development of a FTA among BRICS countries Deepen China s economic and trade cooperation with developing countries in Latin America and Africa 43 D. Explore the possibility of bilateral free trade cooperation with some countries and regions Explore the establishment of high-standard FTAs with China-South Korea FTA and China-Australia FTA as the start Steadily promote negotiations for a China-EU investment agreement and explore the possibility of establishing a China-EU FTA Accelerate negotiations for a China-US bilateral investment treaty 49

7 China s FTA Strategy v Acronyms ACTPN BFA BIT BRICS CAFTA CEPA CEPEA CEPR CIS CITES CJK EAFTA EPA FTA FTAAP FTZ GATS GATT GCC IPR ISDS ITEC LDCs MERCOSUR MOFAT MoU NAFTA NEC NGO OECD Advisory Committee for Trade Policy and Negotiations Boao Forum for Asia Bilateral Investment Treaty Brazil, Russia, India, China and South Africa China-ASEAN Free Trade Area Closer Economic and Partnership Arrangement Comprehensive Economic Partnership in East Asia Centre for Economic Policy Research Commonwealth of Independent States Convention on International Trade in Endangered Species of Wild Fauna and Flora China-Japan-Korea East Asia Free Trade Area Economic Partnership Agreement Free Trade Area or Free-Trade Agreement Free Trade Area of the Asia-Pacific Free Trade Zone General Agreement on Trade in Services General Agreement on Tariffs and Trade Gulf Cooperation Council Intellectual Property Right Investor-State Dispute Settlement Interagency Trade Enforcement Center Least Developed Countries South American Common Market Ministry of Foreign Affairs and Trade Memorandum of Understanding North American Free Trade Agreement National Economic Council Non-governmental Organization Organization for Economic Cooperation and Development

8 vi CIIS REPORT PENT RCEP ROK RTA SAR SMEs SOEs S&ED TPA TPP TPRG TPRM TPSC TTIP USTR WTO Pre-Establishment National Treatment Regional Comprehensive Economic Partnership Republic of Korea Regional Trade Arrangement Special Administrative Region Small and Medium-Sized Enterprises State-Owned Enterprises Strategic and Economic Dialogue Trade Promotion Authority Trans-Pacific Partnership Trade Policy Review Group Trade Policy Review Mechanism Trade Policy Staff Committee Trans-Atlantic Trade and Investment Partnership United States Trade Representative World Trade Organization

9 China s FTA Strategy vii Summary Since the outbreak of international financial crisis in 2008, the world has been plagued with a sluggish economic recovery. At a time when the Doha Round negotiations are not likely to make any progress, major economies in the world have been actively exploring bilateral or plurilateral free trade agreements (FTA) outside the WTO framework so as to boost external trade and economic growth. The US-led Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP), as well as the changes and development of regional cooperation in East Asia will all have a profound impact on the regional economic development and international trade patterns. A. The launch and progress in the construction of major FTAs in the world Among the FTA negotiations being held in recent years, TPP and TTIP talks are without doubt having the greatest impact on the international economic and trade pattern. Connecting countries across the Pacific and the Atlantic respectively, the TPP and the TTIP constitute the dual ocean strategy of the United States in global economic and trade areas. The two gigantic FTAs have involved major developed economies in the world and important ones in the Asia-Pacific, aiming at open, high-level and high-standard free trade arrangements. Their main topics include almost every aspect of the trade in goods and services, such as intellectual property rights (IPR) protection, labor standards, environmental standards, development of small and medium-sized enterprises (SMEs), financial supervision, competition policies and economic legislation, etc. The TPP and the TTIP have thus reflected a two-winged free trade strategy of the United States. Once established, they are not only in the interests of developed countries like the United States, the European Union (EU) and Japan in terms of economic recovery from the financial crisis, but very likely to have important implications for the emergence of new global economic and trade rules, and the adjustment of world economic pattern. Regional Comprehensive Economic Partnership (RCEP), as an upgraded

10 viii CIIS REPORT version of the East Asia regional cooperation, involves ten ASEAN member countries, China, Japan, South Korea, India, Australia and New Zealand, covering 49% of the world s total population, and about 30% of the world s GDP and total trade volume. 1 Compared with the TPP, the RCEP is regarded as a more agreeable path for the emerging economies in Asia to achieve trade liberalization with its relatively low standards and differentiated treatment. Till now, the RCEP negotiations have undergone 13 rounds and 4 ministerial meetings. Some progress has been made in the three basic topics: trade in goods, trade in services, and investment. A study on China-Japan-Korea (CJK) FTA negotiations was initiated on the non-governmental level in 2002 and the three counties heads of government held their first meeting in 2008, showing that the CJK economic cooperation has got on a fast track. In May 2012, leaders of the three countries issued a Joint Declaration on Upgrading Comprehensive Partnership of Cooperation. The three countries agreed to launch the CJK FTA negotiations in the same year, and officially inked a trilateral investment agreement the first legal agreement on CJK economic cooperation. The economic and trade ministers of the three countries declared the beginning of CJK FTA negotiations in November 2012 during the East Asia Summit held in Phnom Penh, Cambodia. Since then, ten rounds of negotiations have been held, and some progress achieved. In the meanwhile, China-Japan bilateral relations deteriorated rapidly with the dispute over the Diaoyu Islands (known as Senkaku Islands in Japan) while Japan-South Korea relations were also bogged down due to the denial of the war of aggression on the part of Japan. Despite these negative factors, the CJK FTA negotiations have not stopped, which shows that the three countries share the firm desire to build the trilateral FTA. B. Challenges China faces in its FTA development Since China and ASEAN signed the Framework Agreement on China-ASEAN Comprehensive Economic Cooperation in November 2002, steady progress has been made in China s FTA development. Currently, China has signed 14 FTAs with 22 countries and regions, including Australia, South Korea, Switzerland, Iceland, Costa Rica, Peru, Singapore, New Zealand, Chile, Pakistan, ASEAN, Hong Kong, and Macao. 2 Additional eight FTAs are under negotiation, namely China-Gulf 1 Han Liqun, Quanqiu Jingmao Xin Geju Beijing Xia De RCEP: Yingxiang Yu Zoushi (RCEP Against the Backdrop of New Global Economic and Trade Patterns: Implications and Trends), Dangdai Shijie (Contemporary World), No.7, 2013, pp Ministry of Commerce, People s Republic of China, China FTA Network,

11 China s FTA Strategy ix Cooperation Council (GCC) FTA, China-Norway FTA, CJK FTA, RCEP, China-Sri Lanka FTA, China-Pakistan FTA (second stage), China-Maldives FTA and China- Georgia FTA. 3 Besides, five bilateral FTAs are now under consideration, which involve India, Columbia, Moldova, Fuji and Nepal. 4 Although China has made considerable progress in building its FTA network, it still lags behind the developed countries in this respect. In terms of FTA coverage, China falls behind European countries, the United States and most East Asian economies. For instance, while ASEAN, South Korea, Japan, Australia and New Zealand have almost finished building their own FTA networks, China has yet to achieve that. Especially in terms of the FTAs under negotiation or consideration, there exists a big gap between China and its East Asian partners. But the gap is narrower between China and the EU or between China and the United States as the latter two economies are reluctant to launch FTA talks with China whereas most East Asian economies have signed or are prepared to sign FTAs with the aforementioned three major economies in the world. China faces various challenges in its FTA development. First of all, the increasingly deteriorating trade and investment protectionism around the world is but an inevitable obstacle. China s economic rise in recent years has incurred criticism and even blame from some developed countries in the West. Some major trading partners of China have even gone so far as to pursue protectionist policies against China s export and shown little enthusiasm to engage in FTA talks with China. Secondly, China faces enormous challenges and even blockade in acquiring a say in the formulation of new trade rules. A point in question today in bilateral or multilateral free trade negotiations is that the US-led developed countries are trying to keep China and other developing countries out of the door for the time being by setting up high thresholds so that they can occupy the commanding heights in the formulation of new international trade rules. Yet, it is determined by China s national conditions that the construction of China s FTA network must be a gradual, progressive and steady process. Once the developed countries succeed in monopolizing rule-making for future international trade, China will encounter the same dilemma when applying to accede to the WTO. Thirdly, the geopolitical factors have constrained China s implementation of its FTA strategy. The biggest disturbing factor for East Asian economic integration is the United States. It has tried to increase its political and strategic presence in the Asia-Pacific region by implementing the so-called Rebalancing toward the Asia-Pacific 3 Ibid. 4 Ibid.

12 x CIIS REPORT strategy and to seek comprehensive dominance in Asia-Pacific regional economic integration through the TPP. Therefore, countries in East Asia need to demonstrate considerable strategic willpower to overcome the adverse factors arising from geopolitical tensions. Lastly, China is facing institutional bottlenecks at home in implementing its FTA strategy. The development of FTAs involves profound readjustment of different interests both at home and abroad. The situation of different government departments creating difficulties for each other, inappropriate institutional setup, inadequate human resources, intellectual support lagging behind, poor information communication and top-level design being divorced from actual negotiations and implementation have all seriously hampered the implementation of China s FTA strategy. C. Specific ideas and policy choices of China s FTA strategy 1. Make efforts to advance the Doha Round negotiations so as to safeguard the WTO multilateral framework Firstly, the significance of the multilateral trade system must be affirmed against the backdrop of globalization. The global financial crisis has not changed the general trend of economic globalization, and the multilateral trade system is still making great contribution to the world economy. The WTO remains the main front in the fight against trade protectionism, and it plays an important role in resolving such global issues as environmental degradation. The WTO is also conducive to the establishment of a new world economic order that is fair and reasonable. Secondly, China should realize that the WTO continues to bring benefits to its member economies. The influx of new members has helped ensure the vitality of the multilateral trade system. In return, the WTO has continued to benefit new members such as Russia and Laos in trade liberalization, facilitation and other fields. It is also conducive to the deepening of regional economic cooperation. Thirdly, efforts should be made to break the deadlock in the Doha Round negotiations as early as possible. The deadlock of the Doha Round talks has continued for years and the reasons for that lie at multiple levels. To break the deadlock at an early date, China should play an active role by uniting the vast number of developing countries to urge the developed ones such as the US and the EU to advance internal reforms of the WTO.

13 China s FTA Strategy xi 2.Continue to base itself on the neighborhood and focus on the promotion of Free Trade Area of the Asia-Pacific (FTAAP) on the basis of regional cooperation in East Asia Currently, FTAs within the East Asia framework have come to a crucial stage of development. As an important advocate and supporter of this process, China should increase its resource input and support in this phase so as to fully ensure that the RCEP negotiations be concluded on time. In addition, China should handle the relations between the TPP and the RCEP properly. Running parallel to each other, the TPP and the RCEP are in competition in East Asia and the Asia-Pacific at large. The course of their development will directly affect the future of Asia-Pacific economic cooperation. But the two mechanisms are not antagonistic to each other. Their relationship is both competitive and cooperative. The two mechanisms will co-exist and compete with each other for a long time. Therefore, while pushing forward the RCEP negotiations, China should adopt an open approach to the TPP, drawing useful lessons and inspirations from it for building its own FTAs with foreign countries and deepening domestic reforms. In the long run, China should promote the FTA process in East Asia with the FTAAP as the goal. Chinese Premier Li Keqiang proposed in the Boao Forum for Asia (BFA) 2014 that a feasibility study on the FTAAP may be considered. And the APEC trade ministers meeting in Qingdao in May 2014 agreed to draft the APEC Roadmap of Promoting FTAAP, which was adopted by APEC Economic Leaders Meeting in Beijing in November When promoting the East Asia FTA centering on the RCEP, China should make efforts to turn it to be a solid foundation for the FTAAP. 3. Endeavour to promote FTAs with developing countries and build a model of South-South FTA Firstly, efforts should be made to build a FTA network involving the regions along the Belt and Road. China should develop the 21st-Century Maritime Silk Road on the basis of CAFTA. Efforts should be made to accelerate FTA negotiations with countries along the Belt and Road that have not signed FTAs with China. China s domestic free trade zones should be further integrated with the international FTAs while promoting the joint development of China s eastern and western regions as well as their international trade partners. Secondly, China should take advantage of the progress made in financial cooperation between BRICS countries to promote the construction of a BRICS FTA. Despite some difficulties and challenges, there exist many favorable conditions for the construction of a BRICS FTA. From a long-

14 xii CIIS REPORT term perspective, BRICS countries share common interests in FTA development. Thus, they can take the New Development Bank as a good opportunity to build a BRICS FTA in a progressive manner. Thirdly, China also needs to further deepen its economic and trade cooperation with developing countries and regions in Latin America and Africa. In spite of rapid progress in trade relations and economic cooperation between China and Latin America and Africa, they are still far from building FTAs. China should therefore work to further develop trade relations and economic cooperation with these developing countries and regions through various channels and in line with the prevailing circumstances to promote trade liberalization and facilitation. 4. Explore bilateral free trade cooperation with some regions or countries First of all, China should actively implement its bilateral FTAs with South Korea and Australia. The two FTAs were signed in June 2015 and came into effect last December. Being China s close neighbors, South Korea and Australia are important economies in the Asia-Pacific region. The bilateral FTAs between China and the two countries are of great significance, which is beyond the bilateral scope, and will directly promote regional economic integration in East Asia. Secondly, China should steadily push forward the negotiations for a China-EU investment agreement and explore the possibility of establishing a China-EU FTA. Negotiating a bilateral investment agreement is a priority that fully accords with the needs of both China and the EU, which is in their common real and strategic interests. Therefore, the two sides should steadily push forward the negotiations with close coordination. Meanwhile, China should begin to explore both the possibility and the feasibility of establishing a China-EU FTA through various channels. Thirdly, efforts should be made to accelerate the negotiations for a China-US bilateral investment treaty (BIT), which has come to a crucial stage of exchanging the negative lists for foreign investment. Conclusion of the agreement is of profound significance to both sides. Although great divergences still exist between the two countries on quite a few issues, China should embrace the BIT by proceeding from clarification of the contents of the negative list, working out effective countermeasures, making good preparations in domestic policies and legislation, and strengthening capacity building of its enterprises.

15 China s FTA Strategy 1 I. The Emergence and Development of Current Major FTAs around the World Since the beginning of the 21st century, economic globalization and regional economic integration have become the main characteristics of the world economy. Especially after the last financial crisis, the world is plagued by a weak economic recovery and little progress in the WTO Doha Round talks. Major economies around the world are exploring bilateral or multilateral FTAs outside the WTO framework to boost their foreign trade and economic growth. The emergence and development of mega-ftas or wide area FTAs like the US-led TPP and TTIP, and the ASEAN-centered RCEP are bound to promote regional economic development and profoundly alter the pattern of international trade. A. The emergence of TPP and TTIP negotiations as pillars of the US Dual-Ocean Strategy Among the FTA negotiations in recent years, the US-led TPP and TTIP, covering economies around the Pacific Ocean and the Atlantic Ocean respectively and constituting the dual-ocean strategy of the United States in global economy and trade areas, have exerted the greatest impact on the world economic and trade pattern. 1. TPP may become the main channel for Asia-Pacific regional cooperation TPP refers to the FTA negotiations among 12 countries including the United States, Japan, Australia, New Zealand, Canada, Mexico, Peru, Chile, Malaysia, Singapore, Brunei and Vietnam. It came into being from the early efforts of Singapore, New Zealand and Chile in 2003 to pursue trade liberalization in the Asia-Pacific region. In 2006, Brunei joined in and the four countries concluded the Trans-Pacific Strategic Economic Partnership (P4), which committed the four countries to offer each other preferential treatment and strengthen cooperation in areas like trade in goods and services, IPR protection and investment. The Agreement was open to

16 2 CIIS REPORT all and welcomed members of the Asia-Pacific Economic Cooperation (AEPC) to join in. In March 2008, the United States joined the P4 in talks on investment and financial services, and later announced its full participation in the negotiations, thereby changing the P4 into today s TPP. Till now, 19 rounds of formal negotiations and nearly 20 rounds of ministerial-level and informal talks have been held, leading to the signing of the agreement in October On November 5, 2015, the Office of U.S. Trade Representative (USTR) released the full text and supplementary clauses of the TPP agreement on its website. Later on, Canada and Australia also released the agreement. Totaling more than 6,000 pages, the TPP agreement includes 30 chapters, 442 clauses and 81 side letters. It covers numerous aspects, including trade in goods and services, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, intellectual property, government procurement and competition policy, etc. Besides, the agreement includes tariff-elimination schedules of 12 member countries and four annexes specifying exceptional clauses on financial services, investment and state-owned enterprises (SOEs). The TPP has been regarded as a high-standard, next-generation FTA that covers a wide range of topics. 2. TTIP is likely to become the largest FTA in the world TTIP can be traced back to the New Trans-Atlantic Marketplace (NTM), which was proposed at the EU/US summit in Madrid in The economic and debt crises that hit both the United States and European economies and the stagnation of WTO trade talks have contributed to the re-launch of the NTM initiative with the purpose of exploring new paths to restore economic growth. On February 13, 2013, US President Barack Obama, then President of the European Council Herman van Rompuy and then President of the European Commission José Manuel Barroso jointly declared to launch the FTA negotiations. On March 12, 2013, the European Commission adopted the draft mandate for negotiating the FTA with the United States. EU members gave green light to the resolution of the European Commission to enter into TTIP negotiations on June 14, The first round of TTIP talks was held from July 8 to 12, 2013 in Washington, during which a preliminary framework of negotiations was agreed upon, which covers 20 topics, including market access for agricultural and industrial products, government procurement, investment, services, energy and raw materials, regulatory topics, intellectual property, small and medium-sized enterprises (SMEs), SOEs, etc. Although the two sides planned

17 China s FTA Strategy 3 to conclude the negotiations by the end of 2014, they have not achieved that goal till now due to disagreements in such aspects as investor-state dispute settlement (ISDS) mechanisms, government procurement and geographical indications. Despite that, if the TTIP was concluded, it would, according to the estimate by Centre for Economic Policy Research (CEPR), London, bring significant economic gains to the EU and the United States, with GDP to increase by between 68.2 to billion euros for the EU and between 49.5 to 94.9 billion euros for the US (under the less ambitious and more ambitious scenarios). 1 And the TTIP is expected to become the biggest FTA in the world. 3. Strategic considerations of the United States in adopting the Dual- Ocean Strategy (1) Grasp the opportunity of fast economic growth in the Asia-Pacific region in order to save the US-led western economy. Since the beginning of the 21st century, one of the most remarkable changes in the world economy is the stagnation of Doha Round negotiations under the WTO framework and the steady rise of emerging economies. Asia as part of the world has outshone other regions in economic growth and maintained a sustainable and high economic growth. The global financial crisis that started from the subprime mortgage crisis in the United States in 2007 has not only inflicted heavy losses on the US economy, but also plunged Europe into long-term recession. Executive Order National Export Initiative, setting the goal of doubling US exports in the next five years, was issued in March 2010 by the US government in line with President Obama s State of the Union address delivered in January The Initiative was designed to reignite the engine of industrialization, lead the US economy out of the financial crisis, spur economic growth at the new stage and create job opportunities. The United States hopes to exploit the concept of TPP to get a ride on the fast economic train of East Asia. And after suffering from the last economic and debt crises, the United States and the EU share the same desire to lift themselves out of the crises and restore their economic growth through establishing a new economic and trade alliance. (2) Rewrite international trade and investment rules to balance the rising influence of the emerging markets. It is against the following background that the developed countries like the United States, the EU and Japan have tried to rewrite international trade and investment rules. Firstly, with the Doha Round talks reaching stalemate, the rise of emerging economies in recent years have brought 1 Joseph Francois et al., Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment, Final Project Report Prepared under implementing Framework Contract TRADE10/A2/A16, March 2013, p.2, ec.europa.eu/doclib/docs/2013/march/tradoc_ pdf.

18 4 CIIS REPORT forth an increasingly great say of developing countries in the WTO framework. Consequently, developed economies in North America and Europe have found it less possible to gain trade benefits through the WTO system as they used to do. Secondly, after the international financial crisis, developed economies have not restored economic vigor to the pre-crisis level and seem a diminished force in the international trade. By reshaping standards and rewriting rules governing international trade and investment, they hope to force developing economies to further open their markets so as to gain extra economic benefits. Thirdly, the active participation of developing economies, especially emerging economies, in global governance through multilateral mechanisms such as the G20 to promote a new round of reforms in global governance rules, has added to the pressure on developed countries like the Untied States and the EU, which have to draw up in advance new trade and economic rules through regional FTAs, hoping that the rules could be established as international norms so as to maintain their leading position in future global economic and trade systems. (3) Consolidate the predominant role of US-led developed economies in the world economy. The past decade and more have witnessed the rising power of emerging economies. BRICS countries and other emerging economies have enhanced their influence and acquired a greater say in global economic institutions. The international trade pattern has been undergoing a structural change, which is not only out of the expectation of developed economies, but undermines their predominant role in global trade system. Unreconciled to the situation, developed countries like the United States, the EU and Japan hope to re-establish their position politically and strategically by jointly implementing their FTA strategies. The United States has participated in TPP talks with a high profile in order to rebalance toward the Asia-Pacific economically, and its effort has been supported and well coordinated by Japan. At the same time, the US-proposed TTIP has received support from the EU. If progressing well, TTIP will undoubtedly strengthen policy coordination between the two largest economies in the world in terms of Asia policies. By way of multifold arrangements of regional integration including the North American Free Trade Agreement (NAFTA), the TPP and the TTIP, the United States will find it easy to ensure its predominance in the multilateral trade system, thereby safeguarding its dominant role in the international economic and trade areas.

19 China s FTA Strategy 5 B. The emergence of RCEP as an upgraded version of East Asia regional cooperation 1. RCEP has become a new pathway to East Asia regional cooperation At the 18th ASEAN Economic Ministers Meeting in February 2011, participating ministers held discussion on how to reach a joint comprehensive FTA with ASEAN s economic partners, and finally brought forward a draft on building regional comprehensive economic partnership (RCEP). In their first meeting in August 2012 in Cambodia, economic ministers from ten ASEAN member countries and ASEAN s six FTA partners, namely China, Japan, South Korea, India, Australia and New Zealand, jointly endorsed the Guiding Principles and Objectives for Negotiating the RCEP. The RCEP negotiations were formally launched in November 2012, when leaders from the aforementioned 16 countries endorsed the Joint Declaration on the Launch of Negotiations for the RCEP. Compared with the TPP, the RCEP is regarded as a more feasible trade liberalization arrangement for Asian emerging economies due to its outstanding features such as relatively low standards and the principle of special and differentiated treatment. The emergence of the RCEP has greatly altered the US-led trade liberalization process in the Asia- Pacific region and restored ASEAN s leading role in trade liberalization in East Asia. Compared with the TPP, the RCEP has brought forth high expectations from participating countries due to its rational goals, close economic ties and high dependency among member countries, and strong political wills within the region to balance US influence. 2. RCEP negotiations have entered a critical stage By August 2016, negotiating parties of the RCEP have held 14 rounds of talks and four ministerial meetings. Participating countries have had in-depth consultations in the fields of trade in goods and services, investment, IPRs, economic and technological cooperation, competition, e-commerce and legal clauses. As the negotiations deepen, topics discussed are expanding and consensus is accumulating. Since parties to the negotiations plan to conclude the talks by the end of 2016, the FTA process within the East Asia framework has reached its final and critical stage. As an important initiator and advocate of the RCEP, China need further increase its input of resources and enhance its effort so as to ensure the successful conclusion of the talks as scheduled.

20 6 CIIS REPORT 3. The RCEP negotiations are viewed with optimism The past 14 rounds of RCEP negotiations have shown that talks are going on smoothly and they are likely to be concluded as planned. (1) Negotiating parties share close economic ties and high complementarity with each other. Asia-Pacific regional cooperation in the past years have brought about closer economic and trade relations among countries in the region and an interdependent regional production network has taken shape. Currently, the trade volume among RCEP negotiating parties accounts for 44.2% of the total foreign trade volume of RCEP countries. 2 The 16 negotiating countries, including both developed economies such as Japan and Australia and emerging economies such as China and India, vary in their levels of economic development. As two most populous countries in the world, China and India have common advantages in labor-intensive industries. On the contrary, Australia has much less labor resources but rich natural resources. The relatively high complementarity makes it possible for RCEP members to expand trade and enhance economic cooperation. Besides, the RCEP membership can help reduce these countries dependence on US and European markets. (2) The RCEP has a solid base in terms of institutionalized regional cooperation. ASEAN has signed FTAs with China, Japan, South Korea, India, and Australia plus New Zealand respectively, which constitute a solid foundation for RCEP negotiations. Despite their low levels in the development and liberalization of trade in services, the 16 RCEP negotiating parties are getting an increasingly large share in the world s total trade volume in services. The dependence rates between ASEAN and China, Japan, South Korea and India have reached 52.6%, 48.01%, 40.4% and 45.77% respectively. 3 Besides, tariffs within ASEAN have been reduced to as low as 0-5%, providing a favorable condition for RCEP negotiations. (3) Relatively flexible mode of operation. Although the level of openness among RCEP members should be higher than the five exiting FTAs between ASEAN and its trade partners, the RCEP will continue to operate with a gradual and transitional process with moderate thresholds. Acknowledging the low development level of some negotiating parties such as Cambodia, Laos and Myanmar, the RCEP establishes flexible mechanisms and offers special treatment and additional 2 Jianmin Jin, RCEP vs. TPP, Fujisu Research Institute, February 22, 2013, column/message/2013/ html. 3 Li Huiru and Zhang Pengyang, 10+6 Quyu Fuwu Maoyi Hezuo Fazhan De Tezheng Ji Qianjing Tanxi (Characteristics and Prospect of Services Trade Integration in 10+6 ), Journal of Hebei University (Philosophy and Social Science), Vol.38, No.2, March 2013, p.42.

21 China s FTA Strategy 7 exceptions for these countries. This will effectively promote the smooth progress of the overall negotiations. Yet, it cannot be denied that the influence of political factors and the contention for dominance among some RCEP parties will have negative impacts on the negotiation process. C. China-Japan-Korea FTA negotiations continue to move forward amidst deterioration of bilateral relations 1. The emergence and development of China-Japan-Korea FTA negotiations The idea of a China-Japan-Korea (CJK) FTA dates back to many years ago. In November 1999, leaders of the three countries, when attending the ASEAN plus three (also called 10+3 ) summit held in the Philippines, met to have an exchange of the views on the prospect of trilateral economic and trade cooperation, thus kicking off CJK trilateral cooperation. In 2002, the idea of a CJK FTA was formally proposed and a non-governmental study in this regard started. In the first trilateral summit held independent of the 10+3 framework meeting in 2008, leaders of the three countries adopted such important documents as Joint Statement on the International Finance and Economy, Trilateral Joint Announcement on Disaster Management Cooperation, and Action Plan for Promoting Trilateral Cooperation, showing that the CJK trilateral economic cooperation is on track. In May 2012, leaders of the three countries adopted Joint Declaration on the Enhancement of Trilateral Comprehensive Cooperative Partnership, decided to launch the trilateral FTA negotiations before the end of the year and officially signed the Trilateral Agreement for the Promotion, Facilitation and Protection of Investment. In November 2012, economic or trade ministers of the three countries met in Phnom Penh, Cambodia on the occasion of East Asia Summit and announced the launch of the trilateral FTA negotiations. Since 2012, ten rounds of talks have been held and positive results achieved. During the latest round of talks, the three sides reached agreement on the range of the trilateral FTA and established five sub-working groups on the following five topics government procurement, forest products, financial services, electric communication, and movement of natural persons. 4 The three countries also decided to start discussions on market 4 Chinese Nikkei, Zhongrihan Jiang Zai Wu Lingyu Tuijin Tanpan (China, Japan and South Korea Will Push Forward Their Trilateral FTA Negotiations in Five Areas), June 29, 2016,

22 8 CIIS REPORT access barriers in each other s important service sectors from the next round of negotiations. 2. Favorable conditions for building the CJK FTA As three major economies in East Asia, China, Japan and South Korea have surpassed the EU with a combined GDP of 15 trillion USD, about 20% of global GDP and 90% of that of East Asia. However, the volume of trade among the three economies accounted for less than 20% of their total foreign trade. 5 The establishment of a CJK FTA will gradually facilitate a free flow of goods, personnel and capital among the three countries and promote their industrial restructuring and economic growth. As three major economies in Asia, China, Japan and South Korea constitute about 70% of Asia s economic aggregate. The past decade has witnessed a gradual trade structural convergence between China-Japan and China- Korea bilateral trade. The proportion of China s export of machinery and electronic products to Japan has conspicuously increased, of which the majority is processed products exported by Japanese companies in China, and belongs to intra-industry or intra-company trade. As South Korea s imports from China gradually shift from primary products to semi-finished or finished industrial products, intra-industry trade is becoming increasingly widespread. The differences of the three countries in their industrial advantages have contributed to the basis of CJK FTA. As relatively developed economies, Japan and South Korea have clear competitive advantages in capital and technology-intensive industries while China s competitive edge still lies in resources and labor-intensive products. With changes of the international situation and economic restructuring of the three countries, deeper thoughts are required on such questions as whether these advantages can be sustained, or what are the negative effects of the CJK FTA on the three countries and how to achieve cost-effectiveness through institutional construction. 3. Important factors affecting the negotiation process (1) Sensitive fields. Major differences exist on such issues as access to agricultural products market and opening of sensitive industries, over which a conservative approach has prevailed in the negotiations. Japan and South Korea have always persisted in protecting their agricultural industry and refused to fully open their agricultural products markets in FTA negotiations. Moreover, all the three countries have sensitive industries that demand protection. For Japan, they 5 Sun Yuanjiang, Zhongrihan Zimaoqu Shi Dongyajingji Yitihua De Guanjian (The CJK FTA is the Key to East Asia Economic Integration), People s Daily (Overseas Edition), July 20, 2012, p.2.

23 China s FTA Strategy 9 are agriculture, energy sector, and iron and steel industry mainly. For South Korea, they include agriculture, energy sector, and apparel and textile industry. For China, they include automobiles, chemical industry and services. The three countries stick to their own positions, making the negotiations difficult to move forward. (2) Political factors. Territorial disputes and disagreements on the historical issue between Japan on one side and China and South Korea on the other have severely hindered the progress of CJK FTA negotiations. For a long time, a critical uncertainty affecting the economic and trade cooperation among the three countries is Japan-China territorial dispute over Diaoyu Islands (known as Senkaku Islands in Japan) and Japan-South Korea territorial dispute over Dokdo Islands (known as Takeshima Islands in Japan). In 2012, the Japanese government implemented its nationalization plan by purchasing three of the Diaoyu Islands from their private Japanese owner, which triggered public and diplomatic protests in China. And as a result, the CJK FTA negotiations were stalled. Although afterwards the negotiations continued, the situation in which a political dilemma disrupting economic cooperation occurred, which was an unwelcomed result no country would like to see. After the Diaoyu Islands crisis, the relationship between China and Japan has plunged into the worst period since the normalization of their diplomatic relations 40 years ago. And the rising Sino-Japanese tensions have cast a shadow over the prospect of CJK FTA talks. (3) Other choices. The signing of TPP agreement by 12 Asia-Pacific countries has provided another choice of trade liberalization for Japan and South Korea. Japan is already a member of the TPP. South Korea, though a non-member, has clearly stated its intention to join the TPP during its first round of expansion. As compared with the CJK FTA, the TPP includes the United States, with which Japan is in desperate need of concluding a FTA, and South Korea may be facilitated to join the TPP soon by its bilateral FTA with the United States. Therefore, the TPP has largely diverted Japan s and South Korea s attention from the CJK FTA negotiations. Provided that the TPP agreement can come into effect as planned and South Korea joins the TPP in time, the importance of the CJK FTA to Japan and South Korea will be greatly reduced.

24 10 CIIS REPORT II.China Lags Behind in FTA Development on the Whole A.The current situation of China s FTA development Since the signing of the Framework Agreement on Comprehensive Economic Cooperation between China and ASEAN in November 2002, China has made steady progress in FTA development. China s FTA partners spread over Asia, Latin America, Oceania and Europe. In 2015, China s trade volume with its FTA partners accounted for approximately 34% of its total trade volume. 6 China is a late comer in pursuing FTA strategy. At the beginning of this century, China, Japan and South Korea are the only big economies that have not joined any free trade arrangements. In this sense, China s achievement in FTA development is remarkable. Judging from the FTAs that China has signed with foreign countries, there are two models. The first model is a phased process of signing several agreements: first on trade in goods, then on trade in services, then on investment. China s FTAs with ASEAN, Pakistan and Chile fall into this group. Take China-ASEAN FTA as an example. On November 4, 2002, China and ASEAN concluded a framework agreement on comprehensive economic cooperation, confirming that China-ASEAN FTA should be established by 2010, thus formally initiated the free trade process. In November 2004, China and ASEAN inked a commodity trade agreement which started comprehensive tariff reduction in July In January 2007, the two sides signed an agreement on trade in services, which has been implemented from July that year. In August 2009, China and ASEAN signed an investment agreement which contributed to the completion of China-ASEAN FTA in The second model is to conclude a package of agreements at the same time covering areas of commodity trade, service trade, investment, non-tariff trade barriers and IPRs, etc. China s bilateral FTAs with Singapore, New Zealand, Peru, Costa Rica, Iceland and Switzerland follow this model. On October 23, 2008, China and Singapore signed the China-Singapore Free Trade Agreement and the 6 The figure was calculated by the authors using the data provided by the General Administration of Customs, People s Republic of China. See Jinchukou Shangpin Zhuyao Guobie (Diqu) Tongji (2015 Nian 1-12 Yue) (Statistics of China s Trade with Major Countries and Regions from January to December 2015), Guoji Maoyi (International Trade), No. 2, 2016, p.70.

25 China s FTA Strategy 11 Memorandum of Understanding (MoU) on Bilateral Cooperation in the Filed of Labor Services, which cover numerous areas including commodity trade, service trade, labor mobility and customs procedures, thus marking the establishment of China-Singapore FTA. B. China lags behind the US, the EU and ASEAN countries in FTA development on the Whole Compared with the United States, the EU and some East Asian countries, China lags behind in the number of FTAs signed with foreign countries, coverage of FTAs in its total foreign trade, and layout of FTA partners. As shown in Figure 1, in terms of the coverage of FTAs in its overall foreign trade, China lags behind the United States, the EU and the majority of East Asian countries. There exists a big gap between China and its East Asian trading partners in terms of the number of FTAs under negotiation or consideration. However, similar gaps between China and the United States or the EU are smaller. It is because the FTA negotiations between China and the EU and between China and the United States have not been officially placed on their diplomatic agenda, while Japan, South Korea and other East Asian economies have either concluded or been in the process of concluding FTAs with the three largest economies in the world, i.e. the EU, the United States and China. Figure 1. Coverage of FTAs in Total Foreign Trade 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% China US EU Japan ROK Australia ASEAN Coverage of concluded FTAs in total foreign trade Coverage of FTAs under negotiation or consideration in total foreign trade Source: Official statistics released by the aforementioned economies.